What is the actual rate of return for SA government bonds?

Dear reader,

Thank you for your question, I welcome the opportunity to help.

The return of a bond is the function of two things:

1. Coupon (income return): This refers to the interest payments that bondholders receive periodically for holding a bond; and
2. Capital appreciation: This is the return generated by changes in the bond’s market price. which is influenced by changes in such factors as interest rates and the bond issuer’s credit rating.

When investing in bonds, you can either hold them until maturity or sell them before maturity.

The capital appreciation component does not affect a bond that is held to maturity, so the bond simply earns the coupon rate. This is because the bondholder will receive the coupon rate periodically, and at maturity, will receive their full initial investment back. This rate of return is called the bond’s yield-to-maturity (YTM) and is the nominal annualised return a bond investor will receive from holding the bond until maturity. If you would like to keep track of bond YTMs, they are available on various brokerage platforms and websites, including TradingView and Investing.com.

If the bond is sold prior to maturity, then you may not receive the full amount of the principal investment back because its market value may have changed due to changes in interest rates and the creditworthiness of the issuer. Thus, the return earned would be made up of both the coupon return and the less predictable capital appreciation return.

With regard to inflation, the following relationship holds true between nominal and real rates of return.

Real rate of return = nominal rate of return – inflation

South African government bonds currently have the following nominal and real YTMs using the current inflation rate of 7.1%:

If, for example, you bought a two-year government bond that earns 7.575% per annum and held it to maturity, the real rate of return (per annum) would be 7.575% minus the average inflation rate over that period. Thus, to accurately predict a holding period return over two years, you would need a forecast for the expected inflation rate over the period.

As mentioned above, if the bond is not held until maturity, then you would need to consider the above-mentioned factors (changes in interest rates, credit quality and so on) that will affect the capital appreciation component and thus the total return made on the bond investment.